Although the mutual fund industry saw drying up of assets under management (AUM) in June, the state development loans (SDLs) have witnessed renewed interest from MFs. The total mutual fund investment in SDLs as on May 31, 2009 has hit Rs 9.33 billion mark. SDLs are issued by the Reserve Bank of India (RBI) on behalf of state governments to meet their funding requirements.
According to Crisil Fund Services, a combination of attractive spreads and better liquidity and safety, over most corporate bonds, would result in SDLs continuing to be popular with mutual fund managers, especially in gilt funds. At the same time a robust methodology for valuation of these securities is critical to mitigate the potential for sudden losses when they need to be sold.
In recent times, mutual funds have been showing an increasing trend towards investment in SDLs. A Crisil study shows that the exposure to SDLs, as a percent of the AUM of gilt funds was 7.54 % (Rs 4.15 billion), as on May 31, 2009, up from 0.15% as on December 31, 2008. Considering only gilt funds with investments in SDLs, this accounts for a high 35% of the portfolios as on May 31, 2009.
Krishnan Sitaraman, director, Crisil FundServices, said, ?RBI coordinates the investor payouts for SDLs following an automatic debit mechanism from accounts of the state governments maintained with it. This enhances the credit quality of SDLs. Further, liquidity in such securities is higher than in corporate bonds due to good demand from banks on account of their status as eligible SLR (statutory liquidity ratio) securities.?
Crisil is of the view that it is important from an investors? perspective that mutual funds take appropriate steps to mitigate the key risks involved in such securities. Valuation risk constitutes the single largest risk for mutual funds investing in SDLs. ?For institutions investing in SDLs, a robust valuation approach towards these instruments is critical to minimise the chances of sudden losses when such securities are sold,?he added.